Corporate taxation: Commission refers the United Kingdom to the European Court of Justice over improper implementation of an ECJ ruling on cross-border loss relief

The European Commission has decided to refer the United Kingdom to the European Court of Justice (ECJ) for improper implementation of the ECJ ruling in Marks & Spencer on cross-border loss relief. The relevant UK legislation imposes conditions on cross-border group loss relief which make it virtually impossible for tax payers to benefit from such relief. The relevant provisions are incompatible with the right of establishment provided for in Articles 43 and 48 of the EC Treaty and Articles 31 and 34 of the EEA Agreement .

In the Marks & Spencer ruling (Case C-446/03 of 13 December 2005) the Court ruled that it is disproportionate to prohibit a UK parent company from deducting the losses of its non-resident subsidiary, when the latter has exhausted all possibilities for relief in its State of establishment. Following this ruling, the UK should in principle grant relief for definitive losses of a subsidiary established in another Member State.

However, although the legislation has been amended, the UK continues to impose conditions on cross-border group loss relief which in practice make it impossible or virtually impossible for the taxpayer to benefit from such relief in accordance with the judgment in Marks & Spencer. This in particular concerns the following aspects:

An unnecessarily restrictive interpretation of the condition that there should be no possibility of use of the loss in the State of the subsidiary (paragraph 7 of Schedule 18A of the Income and Corporation Taxes Act (ICTA) 1988);

The parent company should demonstrate that the condition that there should be no possibility of use of the loss in the State of the subsidiary is met as from immediately after the end of the accounting period in which the loss arises ( Part 1, paragraph 7(4), of Schedule 18A ICTA 1988);

the legislation states that it applies only to losses incurred after 1 April 2006 ( Part 3 of Schedule 1 of the Finance Act 2006).

According to the Commission, these conditions render the UK legislation incompatible with the freedom of establishment, guaranteed by Articles 43 and 48 of the EC Treaty and Articles 31 and 34 of the EEA Agreement.

The Commission's case reference number is 2007/4026.

Press releases on infringement proceedings in the field of taxation and the customs union can be consulted at: